Tag Archives: Finland

About Finnish unit labour costs

For a text that I am writing, I have been digging around in OECD.Stat, since there are lots of interesting statistics on unit labour costs (ULC). The text, in part, analyses the sectoral changes in ULC in Finland.

The OECD.Stat and Eurostat definition are the same (and actually the statistics come from/through Eurostat to OECD.Stat according to the information.) To remind:

Unit labour costs (ULCs) measure the average cost of labour per unit of output. They are calculated as the ratio of total labour costs to real output.

In other words, as Knibbe (2015) states: “It is a crude approximation for the share of GDP going to workers.” It important to note that in this ratio, “the variables used in the numerator (compensation, employees) relate to employed labour only while those in the denominator (GDP, employment) refer to all labour, including self-employed.

The OECD offers deconstructed data, where the components (in the employment based ULC) are separated. For Finland, it looks like this:

Source: OECD.Stat

Source: OECD.Stat

It is clear that Finnish ULC dropped because of the sudden drop in GDP from 2007-2008, NOT because of outrageous wage increase in 2007-2009. In fact, those alleged big wage increases are not really visible here – until 2012 the graph shows a quite steady increase in labour compensation per employed persion; it is possible to say that the average rate of growth has not changes very dramatically. GDP, on the other hand, has changed dramatically, and although the labour compensation has flattened since 2012, the GDP has declined more/flattened more.

That is the nearly 4 year stagnation that we have experienced in Finland. ULC has obviously declined as matter of statistical fact, but from the graph it is quite clear to see how much labour compensation would have to change to restore ULC to the pre-2007 level. And although I do not have the means to simulate this, such a decline in labour compensation would almost certainly have a very negative impact on the GDP (as I have argued before, the Finnish economy was kept afloat through domestic demand. Not anymore!).

So I do understand the worries of Finnish business life about “competitiveness”. For individual firms the combination of stagnant economy and rising labour compensation is toxic. But the point is simply that ULC is in no way a suitable measure of competitiveness! And, beyond that, there is an argument to made (as Knibbe (2013) does, that ULC should increase, given the ECB’s inflation target. – iIn particular given that in Finland producer prices have been sliding since 2012 and that there are not many upwards pressure on the Finnish CPI .

Where politicians talk about structural reform (and mean wage decreases) I think Finland needs structural reform of its industrial base. Looking for new markets. Innovating. Moving into selling more high-value added products. Of course, in a developed country like Finland it is clear that the domestic market has a large impact on GDP, more so than exports, but it certainly doesn’t hurt to use Finland’s high-tech potential more! In any case it should be long due that politicians acknowledge that wages are not the issue here (or only a minor issue). The big issue is still European and world demand. In recent days there have been commentators speaking about Finland missing the last legs of the growth cycle. They may be right, but also then Finland has to reconsider deep and hard what it sells, and especially HOW.

Is Finnish foreign policy on Russia in for a change?

Yesterday I wrote a short blog on asylum seeker routes. The thing that piqued my interest was the statement by EASO director Robert Visser, who stated in Dutch newspaper Trouw, that “Since a few weeks, Finland gets remarkable amounts of asylum seekers [through Russia]”.

In Finland, reports are focused on Tornio, which is situated between Sweden and Finland at the end of the Gulf of Bothnia. So far, I have heard little about border crossings at the Salla or Raja-Jooseppi stations. This article states that this year, so far, only 12 asylum seekers have crossed the border in Raja-Jooseppi (in Northern Lapland) although the authors are wondering whether the situation would develop like in Norway (Storskog).

So this means that EASO has more information, or that they are simply wrong.

But suppose the informed estimate is correct and asylum seekers are travelling through Russia to Finland (or Norway), what questions does that raise for Finnish foreign policy? (I leave aside the question of probably extremely harsh winter circumstances in Russia).

Given that apparently the Finnish foreign ministry has a campaign in the near Middle East trying to discourage people from coming to Finland, I would think that the Finnish government would not be very happy if large groups of people start arriving in Northern Finland. The question then is: what kind of co-operation is there between Finland and Russia on information sharing regarding asylum seeker movements?

Personally I think current Finnish policy regarding asylum seekers is counter-productive and not just, but that is not relevant for now. Since my guess is that asylum seeker flows will seek the route of least resistance, I suppose that if significant amounts of people start turning up at the border with Russia, Finland may have to adapt its policy regarding Russia, since given the policy of keeping asylum seekers out it would need co-operation on the Russian side.

This would have quite big implications for the EU also. Finland’s economy was kind of sacrificed with the sanctions on Russia, and the conflict between the EU and Russia about Ukraine may have implications for this Syria asylum seeker issue as well. It is not written in stone that Russia will help in this (i.e. trying to stem the flow) unless it can get some kind of lessening of the sanctions.

Although I obviously have no data to back this scenario up, I am sketching a possibility. It may or may not come true, or in another way, but increasingly the crises that the EU faces become interconnected. And as in the past, Finland is again between Russia and the West. I hope and trust that the Foreign Minister and his civil servants have the knowledge and skills to successfully navigate this crisis.

Link: “Sipilänomics, or Finland’s fake austerity”

If you are interested in reading about what is happening in Finland right now, read this blog post. Most of it is very useful but I disagree with the notion of ‘not trying to balance the budget.’/”not really trying austerity”. The author does not apparently realize that the great rise in government debt comes from automatic stabilizers, i.e. as unemployment rises, so also government spending on unemployment benefits rises. Finland does have union managed unemployment funds, but these are mostly funded by the state (see here for an overview by the managing institution of unemployment funds).

So, this post is useful for the political economy of government spending and rearranging employers’ contributions etc (the redistribution of income issue) but don’t put too much weight on the ‘fake austerity’ dimension.

Finland: what is its competitiveness?

The Finnish economy is not doing well, regardless of the better-than-estimated growth. Politicians, business representatives and also labour unions talk about Finland having become uncompetitive, especially relative to Germany. This is commonly expressed through a comparision of the (Real) Unit Labour Cost developments. Especially the wage increases in the sectoral collective bargaining rounds of 2007-2008 are frequently blamed for Finland’s downfall.

Recently, I have read all kinds of literature related to trade diversification, export performance and such. It was also nice to discover this website, which can provide a wealth of insight. Basically my thought for this post is: If Finland is so uncompetitive, this must somehow show up in the data. Another issue is: Finland is frequently mentioned as very competitive and high-tech, such as in this article, but does this show up in Finland’s exports?

Regarding the first question:

Export destinations of Finland (1995-2012)

Export destinations of Finland (1995-2012)

The top export destinations of Finnish exports are Sweden, Germany and Russia (followed by the Netherlands, UK, USA and China). That is the ‘macro’ picture. If you look at those individual countries, you will see completely different ‘export packages’.

Finnish exports to Germany (2012)

Finnish exports to Germany (2012)

Half of what Finland exports to Germany is either paper goods or metal goods (this can be steel plates, zinc, nickel, iron pipes etc.). Machines account for nearly 18% of exports. These are typically machines for the German industry to make things (e.g. paper machines, processing machines, lifting machines, …) but it also includes telephones, electrical transformers and electrical motors.

For Finnish exports to Sweden the picture looks quite different:

Finnish exports to Sweden (2012)

Finnish exports to Sweden (2012)

Mineral products is the category code for e.g. oil-based products, like petroleum and refined petroleum. Chemical products also include medicaments.

Finally, exports to Russia look like this:

Finnish exports to Russia (2012)

Finnish exports to Russia (2012)

Again, chemical products, phones, computers and other machinery are a large part of exports, but Russia is also a significant market for Finnish dairy products.

To make the picture complete, I provide a list of the Top-40 export products from Finland (in 2012), in terms of export value (in US$), see below. What I find striking, is that in terms of the classification used by Cafiso (2009) there are only a few high-tech export products in the top-40,  and the top-6 features ‘traditional’ industry products, as in relatively low-tech. In terms of export value, the Finnish paper industry is far from being history.

When we go back to the first question – does Finnish uncompetitiveness show up in the data? – it depends what you look at!! Here are the graphs fror the top-3 products:

Kaolin Coated Paper exports

Kaolin Coated Paper exports

Refined petroleum

Refined petroleum

Stainless steel

Large Flat-rolled Stainless Steel

Strange to say maybe, but depending on the destination and the product Finnish competitiveness does not look too bad. Yes, the start of the Great Financial Crisis is visible in the data in 2008-2009 and from 2011 European demand for two of the three products here is in decline. But that doesn’t mean that Finland is uncompetitive – German exports of stainless steel and kaolin coated paper also declines, especially in Europe.

I think one of the most relevant lessons of these sketches is that in Finland the industries that produce the top-40 products are typically very capital-intensive.  It may be true that Finnish Real Unit Labour Costs are higher than in Germany, but does it matter? Storm and Naastepad (2015) conclude that for Germany (and other industrialized countries) trade is not very sensitive to changes in Real Unit Labour Costs.

This overview of some of the aspects of the Finnish export industries has implications for the labour market relations and what issues are emphasised (either by labour unions, the state or employers). I hope to write more about that in a later phase.


Refined Petroleum $7,571,937,492.43 10.06%
2 Kaolin Coated Paper $5,546,692,160.65 7.37%
3 Large Flat-Rolled Stainless Steel $3,188,856,875.23 4.24%
4 Uncoated Paper $1,896,120,674.00 2.52%
5 Sawn Wood $1,578,749,613.50 2.10%
6 Sulfate Chemical Woodpulp $1,554,623,680.00 2.07%
7 Packaged Medicaments $1,402,117,640.52 1.86%
8 Electrical Transformers $1,397,459,014.12 1.86%
9 Telephones $1,213,812,358.00 1.61%
10 Excavation Machinery $1,141,698,501.29 1.52%
11 Broadcasting Equipment $977,911,850.49 1.30%
12 Papermaking Machines $874,822,111.30 1.16%
13 Machinery Having Individual Functions $821,263,336.80 1.09%
14 Electric Generating Sets $809,612,169.02 1.08%
15 Medical Instruments $789,197,173.22 1.05%
16 Electric Motors $707,507,667.19 0.94%
17 Other Construction Vehicles $652,354,778.80 0.87%
18 Raw Nickel $648,832,883.17 0.86%
19 Raw Furskins $619,987,425.28 0.82%
20 Raw Zinc $602,721,172.66 0.80%
21 Uncoated Kraft Paper $596,906,691.21 0.79%
22 Stone Processing Machines $574,838,607.82 0.76%
23 Plywood $570,319,551.66 0.76%
24 Cellulose Fibers Paper $557,917,828.69 0.74%
25 Cars $529,368,714.55 0.70%
26 Refined Copper $526,786,902.13 0.70%
27 Rubber Tires $522,128,649.04 0.69%
28 Valves $512,834,686.85 0.68%
29 Lifting Machinery $500,867,236.02 0.67%
30 Ethylene Polymers $495,928,852.51 0.66%
31 Passenger and Cargo Ships $456,775,890.54 0.61%
32 Other Uncoated Paper $430,972,171.17 0.57%
33 Electric Motor Parts $428,195,865.56 0.57%
34 Low-voltage Protection Equipment $423,857,644.83 0.56%
35 Flat Flat-Rolled Steel $421,897,577.90 0.56%
36 Coated Flat-Rolled Iron $415,547,511.74 0.55%
37 Special Pharmaceuticals $415,278,848.27 0.55%
38 Computers $411,008,464.22 0.55%
39 X-Ray Equipment $404,066,790.60 0.54%
40 Tractors $401,011,453.94 0.53%

Interviewed for Investment Perspectives on Share Radio

On Wednesday, I was interviewed by Robert van Egghen of Investment Prespectives on Share Radio. It was my first radio interview ever, and probably as a result of my overly winding answers, only a small section of the material was used. But I think the whole section, which considers the state of the Finnish economy and whether Finland would leave the Euro is very interesting.

You can listen to the segment here.

Below I have copied the answers I actually prepared based on the questions I received. Note that while many economists seem to think Finland has structural problems (as in neoliberal structural i.e. labour market negotiations, unions, collective agreements, welfare state..) I think the decline in (labour) productivity signifies another kind of structural issue: the Finnish economy has been changing rapidly, in that there has been a significant decline in industrial output. So in my view, this lower productivity level shows more a change towards services than any kind of “structural” problem like too high labour costs.

– Why is Finland’s economy struggling?
A combination of deficient demand in the Eurozone, sanctions on Russia and austerity politics domestically which squeeze purchasing power and increase unemployment. Nonetheless, there are export sectors which perform well, such as the board and pulp industries and recently the shipbuilding industry has gained important new orders. Also companies like Kone, escalators and elevators and Wärtsilä, ship engines and other marine technology perform well. The impact of the sanctions on Russia is fairly recent and affects mostly food and dairy producers.

– Problems in export market:
Demand for Finnish goods. The story of Nokia is well-known and as a result many jobs were lost in the IT sector and related sector, although many ex-Nokia employees are regrouping into new small companies. As for the pulp and paper industry: demand for paper is declining for a long time already but demand for pulp and board is still booming, thanks to the Asian markets.

On a more basic level, the problems relate to the construction of the EMU and in particular the policies of Germany. German wage repression has led to a large gap in e.g. unit labour costs and relative competitiveness, which the Finnish economy can’t repair. The German policy has been clearly deflationary and Germany has undershot the inflation norm of 2% for many years. This has harmed many countries in Europe, not only Greece and Spain, but also the Netherlands and Finland. If Germany hadn’t been so obsessed with a trade surplus, the current problems of “healthy” European countries would have been far less. Here you can see that the Euro is very much a fixed exchange rate system, with all the problems that follow from it.

– Productivity levels in Finland
Many sides to this question. On the one hand, you can see the effects of deficient demand – after all, if companies sell less with the same personnel, productivity declines. On the other hand you can observe in the declining or low average productivity a restructuring of the economy. Labour productivity in industry is always much higher than in services and for example in the Finnish paper industry labour productivity is nothing short of astonishing. But with a decline in industry and also slight decline in services sector the average productivity will get lower. Especially since construction is still fairly strong in Finland for the moment, which is a low productivity sector. However, that may change because the application for building permits seems to be on the decline.

– Finland under the radar in the Eurocrisis
Finland has slipped under the radar because until recently it had a triple-A rating and also consistently scores highly on competitiveness indexes. Furthermore, Finland has been rather tough on Greece. So people may get the idea that if only Greece is more like Finland, than it would be in a better shape. Most importantly, Finland, as a Nordic country, simply doesn’t fit in the ‘lazy Southern Europeans’ -explanation of the eurocrisis.

– Fixit?
One politician is campaigning a so-called citizen’s initiative for a referendum on Finnish Euro membership. That apparently has collected many signatories already. The question is who would benefit from Fixit. The export industries may benefit although it is not quite clear cut that a new Finnish currency would devalue against the Euro. That is perhaps the idea. But like Greece, a devaluation of the currency would trash the purchasing power of citizens, which is problematic because Finland does import a lot of food products. Also, it would eliminate the AA-status of Finland in all likelyhood. It is clear that the Euro is not working for Finland, but that is also partly domestic politics – Finnish politics insists on austerity as the recipe to get the economy going. But I think the Finnish economy and Finnish citizens will have to endure a lot more hardship before exit is considered. One advantage Finland has relative to Greece is that its banks are in good shape (perhaps thanks to Finland’s banking crisis of the early 1990s).

– Scandinavian union
In a way, a currency union between the Scandinavian or Nordic countries sounds sensible, since e.g. Sweden and Finland are main trade partners in many sectors. They are potentially close to being an optimal currency area, as even labour mobility between the Nordic countries is quite good. But I think it can only work if there is also fiscal and political union, otherwise it probably will end up like the original Scandinavian Currency Union of 1873, which failed because of politics and, in the end, WW I.

– Further growth of the Finns party?
Timo Soini’s party is now in the government, and in my opinion, Soini has achieved a very big tactical win in Finnish politics by becoming Foreign Minister. It is a topic he is interested in, but most importantly, he can’t be accused (by the media or his own party-base) as implementing policies that harm the Finns Party’s voters (seeing as these are by and large the exact people who may be dependend  on social security and/or dislike austerity politics aimed at curbing the welfare state.). There are many things that may influence the future of the Finns party, but I do see potential for further growth, as long as Soini keeps the rabidly anti-immigrant wing of its party under control.

Greece and Finland in recession – Bill Mitchell discusses

From Bill Mitchell’s blog.

On Finland I want to highlight this quote, because I think this is very much what is happening in Finland, both at the political and at the public discussion level (because nearly all ‘economic wise men’ aka economists come from the same universities. Beyond that, Keynes has never gotten a foothold in Finland, I understand from all this.)

Finland, one of the fiercest supporters of austerity entered official recession. The Finnish response was they had to cut public spending harder because they would be in breach of the Stability and Growth Pact rules relating to size of the deficit and the volume outstanding public debt. These nations are so caught up in neo-liberal Groupthink that they cannot see how ridiculous their policies and supporting dialogue has become.

Finland’s secular stagnation – a small aside

Edward Hugh wrote a very insightful piece on the state of the Finnish economy, especially seen from the secular stagnation perspective. In my opinion it is a very convincing piece and leads one to seriously question current economic policies (which is also possible on other basis, but this has a longer scope fundament).

There is, however, one tiny section of the text where  I feel I have to add something. The text is:

In 2007, when the countries export-led technology industry was booming workers representatives hammered out an 8.5 percent wage increase that was implemented over two years. That deal led to an upward spiral where other industries and then the public sector pushed for ever higher compensation.

This sounds very ominous and ‘profligate’, a typical example of ‘why labour unions are bad for business’ etc.

But this is just the kind of factual reporting that needs footnotes, because otherwise the wrong lessons are learnt from it. So, here we go:

1. 2007 was the end of the final centralized incomes policy

What does that mean? Finland has a long tradition of centralized incomes agreements, which not only include wage increases but also a variety of tax issues, social security reforms and other policies (usually) meant to support the private sector. In 2007, the last centralized incomes agreement ended (its duration was 2005-2007) and the employers’ federations strongly voiced their opinion about this instrument: the TUPO was now dead, it was not of this time anymore. So, following 2007, Finland went on to have sectoral collective bargaining for the period 2008-2011. The first sectoral agreement period was 2008-2009 and in this period there was indeed the ‘spiral’ which Hugh refers to. This was to be expected though, because the empirical literature is quite clear on the fact that in sectoral bargaining the wage increases tend to be higher than at either a centralized or completely decentralized level (the Calmfors-Driffil hypothesis). I’d like to stress though, that it was the employers who wanted to move away from centralized bargaining.

The problem with all this was that the Eurocrisis hit. So, with any agreement, the wage increases would have been to high, but with a sectoral agreement even more so. Finland doesn’t have much in the vein of opening clauses in collective agreements (like Germany) so any adaptation to the detoriorating economic situation has primarily happened through lay-offs and redundancies – in the private sector, but through Finland’s voluntary austerity also very much in municipalities.

In 2009, there was a so-called social agreement, which deals with improvement in unemployment protection policies, in particular regarding temp agency work. Another aspect of this agreement was the improvement of income-dependent pensions.

More important, in 2009 there was an attempt to intr0duce a so-called wage anchor. The employers’ side set this at a maximum wage increase of 0,5% but in practice the average increase in all agreements was approximately 1%. It must be noted that some of the negotiations of wages in 2009 were the actual negotiations for the second or third year of some 2-3 year agreements. The wage anchor came from the ‘opener’ of the negotiations, the metal industry, which agreed on an general wage increase of 1% (and 0,5% individual wage increase).

After the negotiations and agreements of 2009-2010 it started to become clear that the eurocrisis hit Finland particularly hard, with its unit labour costs rapidly exceeding the German levels. So, although the employers had sworn that there would never be a centralized incomes agreement again, they negotiated – after quite some prodding from the state – the so-called Framework agreement. In this agreement it was agreed that in 2 years, the wages would increase by 2,4% and 1,9% respectively. Furthermore, the agreement dealt with a host of qualitative labour market questions (training, unemployment benefit changes for temp workers) and tax incentives (incomes tax changes, corporate tax reduction).

In 2013 the so-called Growth and Employment Agreement was concluded. This agreement focuses nearly entirely on (wage) competitiveness and thus features, over 2 years, a wage increase of 20 euros in the first year and 0,4% 12 months after that. In the present, there are discussions whether to renegotiate the agreement or keep the provision that the agreement would be valid until the beginning of 2017. This is mandated by the agreement, which states that in June 2015 the economic situation has to be evaluated to negotiate a new wage agreement for the second phase of the Growth and Employment Agreement.

So, while it is true that in the period 2007-2009 various sectors demanded high(er) wage increases that the sector that concluded agreements just before (the ‘spiral’) this did not exactly happen anymore after 2009. Although there was much discontent about the unilateral adoption of this wage anchor, which did not completely succeed either but not nonetheless introduced a significant wage moderation already. Also, it must not be forgotten that wage differences in Finland between services and industries are not trivial.

All-in-all, Hugh’s article is a very acute description of the state of the Finnish economy at the moment, but the recent developments in labour market relations are a bit more complicated than it seems.